Should I merge my old pension pots into one scheme?
Most pension savers at some point will have a thought about their old pensions and whether or not having one pension, is better than having a few different schemes scattered about.
There is a simple answer, like most things in life, there is a real tendency to merge the schemes for simplicity, however you should tread carefully. There are a number of advantages and also a number of potential advantages.
The first thing to be aware of is that your employer isn't responsible for your pension pot, as part of Auto-enrolment, all companies must provide a suitable scheme, select a default investment and make minimum contribution levels. Above these requirement, there is no obligation for them to do anything else.
One thing that people usually say to me is; "I was with my old company for a while and I was always told that the pension scheme was really good", what they typically mean is that their company made high pension contributions on their behalf, not that the scheme/investments/pension was any good.
It is crucial to look at each scheme, on an individual basis and when considering the merits of each scheme, there are a few basics;
Charges - what are you paying and who are these charges going (and for what)? Typically most will pay a fee to the Pension Provider for administering the scheme (e.g. Standard Life) and then they may also pay a fee for the actual investment that Standard Life provide. There is now a cap on the charges that a workplace scheme can charge (0.75%), however prior to auto enrolment it is not uncommon to see charges that are twice as much. There may also be initial charges for any contributions that you make.
Fund choice - as stated above, your scheme will likely have a default fund/investment and typically this will be a Pension fund that spreads it's money across a wide range of different assets, ranging from company shares to government bonds. There will also likely be multiple other investment choices, that come with a wide variety of risk levels. Quiet often the default option is not always your best option, however rather than switching schemes, perhaps an alternative investment choice could be found.
Special benefits - these are becoming less common, however many older schemes had Guaranteed rates attached to them and importantly these can't always be retained after a transfer
Retirement - when you finally get to retirement age, there is a good chance that many of the older schemes do not facilitate the payment method that you need and therefore a transfer is essential. Would doing this earlier allow decades of reduced costs/better investment returns?
Death - what kind of post would this be if we didn't talk about death to lighten things up. Two things here. Firstly, you should ensure that you have made a nomination for where you want the funds to go if you die and this should also be kept up-to-date. If you have multiple pensions you also need to make sure that whoever would be in charge of handling your estate, can find all the details. Secondly, many of the older schemes, on death, only have the option to pay any money out to your nomination as a cash payment. Now, this doesn't sound too bad, however this could lead to potential tax issues.
Let's say for example that you are married, employed and earn £80,000 per annum. You have £200,000 in your pension and your house and savings are worth £600,000.
Your Inheritance Tax (IHT) threshold, with the Main Residence nil rate band, would be £975,000, meaning that any assets valued above this, would be taxed at 40%.
On first death, the spouse might receive;
- The House and savings = £600,000
- Death in service - 4 times annual salary = £320,000
- Pension as cash = £200,00
Total = £1,120,000, leaving a potential Inheritance tax bill of £58,000
If the pension scheme has the ability to nominate the pension money to a nominees account, then the size of the estate would be the same, however the £200,000 in the pension would be sheltered from IHT. The result is that their estate for IHT purposes would be worth £920,000 and therefore potentially saving the couple £58,000.
There are many points to consider and advice (as early as possible) is crucial to ensure that you don't spend years being over charged, in poor performing pensions.
The starting point should always to review what you have, look at the charges you are paying and compare these with that is now available. Do you have any benefits that a new scheme wouldn't have and if so, are these useful benefits, or are your prepared to give them up? What investment returns am I getting for the risk I am taking, are there alternative investments, either within the same contract, or on the open market?
Acting early can save you ten's of thousands of pounds.
* The information provided is correct at the time of writing and is for guidance only, rather than advice. You should always seek financial and tax advice before making any decisions.